In One Image, Everything You Need to Know about America’s Demographic Challenge

Why are many developed nations facing long-run fiscal crisis according to long-run estimates from theIMF,BIS, andOECD?

Poorly designed entitlement programs are a big part of the answer, with the United States being an unfortunate example of how fiscal systems become unstable when politicians buy votes by putting burdens on future taxpayers.

But changing demographics is an equally important part of the answer.

Simply stated, birth rates are falling and lifespans are increasing all over the world. Those aren’t bad things. Indeed, longer lifespans are a very good thing.

But it means there won’t be enough workers to finance the modern welfare state. And when there are too many people riding in the wagon and too few people pulling the wagon, that is a recipe for Greek-style fiscal chaos.

When I explain this to audiences, I get the feeling that some folks think I’m exaggerating.

Indeed, some people openly accuse me of exaggerating demographic changes as part of a “scare campaign.”

They’re partially correct. My warnings about the need for reform could be considered a “scare campaign.” But that’s because I am scared. And I’m definitely not exaggerating.

Check out this very sobering image of how America’s population pyramid is turning into a population cylinder. Heck, our population profile will be somewhat akin to an upside-down pyramid by the middle of the century!

I have two thoughts when looking at this data.

The first – and most obvious – reaction is that we better implement genuine entitlement reform if we want to avoid a big mess. And the sooner, the better.

My second reaction is to express some sympathy and understanding (thought not approval) for the politicians who created America’s entitlement crisis.

Social Security was created in the mid-1930s and Medicare and Medicaid were adopted in the mid-1960s. And if you pay close attention to the above image, you’ll see that America had a “population pyramid” during those periods, meaning that there were comparatively few old people, plenty of workers, and then even larger generations of children (i.e., future workers and taxpayers).

With that type of population profile, tax-and-transfer entitlement systems appeared to be financially sustainable. That didn’t mean those programs were a good idea, of course, but it did mean that politicians could plausibly argue that it was okay to create entitlement programs that resembled Ponzi schemes.

The bottom line is that FDR and LBJ were very misguided, but their mistakes look far worse today than they did at the time.

P.S. Demography is not destiny. As I wrote earlier this year, “…there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. …Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze.“

[…] the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is […]

[…] I started. As bad as the numbers are today, they are likely to get worse in the future because of demographic change and poorly designed entitlement programs. So unless we have genuine entitlement reform, we will […]

[…] of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as the […]

[…] of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as […]

While I agree that the system is broken and needs to be fixed, let’s imagine what will happen if it is not:

First of all, as a country there will be zero net effect. Every dollar paid out will be received by a citizen. Some will benefit and some will lose, but as a country winners and losers cancel out.

It would seem at first glance that the producers will be the losers, in that they will be taxed to pay for the dependent. However, markets will adjust. As producers become a smaller percentage their price will rise. In fact, the price must rise faster than the tax burden. Can you imagine a situation where the productive will accept a reduction in after tax real take-home pay for an increased work load, when job recruiters are banging on their door?

This does not mean that inflation won’t go crazy or that individuals will not lose jobs to automation, but producers as a group will do better than the dependent.

It is obvious that Full Retirement Age (FRA) has not kept up with demographic changes. While my preference would be to eliminate Entitlements completely over time in favor of personal retirement accounts, there is a possible alternative:

FRA could be set to cover a specific percentage of total population, like 15%. Potential retirees would either need to work until FRA or have saved to cover the intermediate time. The problem here is that manual labor cannot be extended as easily as knowledge work. Additionally, saving will need an encouraging “nudge” of some sort. But this can all be worked out as the tax burden decreases relative to what it would have been had Entitlement outlays not been reduced.

Sometimes decline is initiated by serendipitous actions and there’s just nothing you can do about it.

There is no politically and electorally realistic way for these developed democracies to make these programs sustainable without further flattening their personal effort/reward curves and thus avoid the death spiral of eroding competitiveness A spiral that is already well under way.

This does not mean that there is not a way. There simply is no way that voters will form a majority around.

Therefore, few of these democracies will escape the death spiral. Europe is already well into structural stagnation. A permanent norm of 1% average annual growth, way less than half the world average. The U.S. seems to be discovering its new norm trendline of around 2% annual growth, about half the world average. These are all deterministic and inescapable trajectories to decline.

I speculate that most of the few democracies to escape this decline fate will be small nations. Small nations lack current inertia and thus operate more closed loop (though they maintain inter-generational inertia, the ability to foist current “free stuff” on future generations). But in any case, bad policies and decisions in small nations are quicker to bear consequences. The larger nations with their massive electorates have more inertia. Their voter-lemmings do not receive the negative feedback of their free-lunch policies until it’s too late. Free lunches in these societies, maintain their free-lunch illusion status much longer; until a majority of voters are auto-deadlocked into a decline cycle. By that point it’s too late.

But what cannot go on, ultimately will not go on. But it’s a long way, a very long way from where today’s western world voter-lemming is standing, in the world’s top 5%. Sort of like the Argentinian of the 1930s. Life still better in Argentina today than in 1930, but the relative worldwide prosperity ranking in the doldrums, and the associated malaise.

In my view, these large democracies will eventually disintegrate. Even those who give this theory some credence tend to believe that this process will take centuries. I think it may be closer than most people think, as everything human has now irreversibly gained velocity in this early 21st century, and keeps accelerating.

In fact, the decline of western democracies is not a far away threat into the future. The decline in standard of living, the weight of unsustainable collectivism is already here and takes many forms. Take for example the suppression of saving throughout the world. The new norm of no return on safe investments (no reward for delayed gratification, no reward for postponing current enjoyment to let someone else use and benefit, temporarily, from the fruit of your labored) and the suppression of the entire risk/reward curve, down towards more risk and less return.
Why? Because voters pushed their elected representatives to make the welfare entitlements sustainable. One of the few ways representatives could react is by lowering interest rates so that the public purse can continue to borrow indefinitely — or at least until the current shift of politicians is out of office — a seemingly free lunch, at the expense of savers. Savers who have apparently not yet digested the lesson of near permanent lower returns. This one last card of free-lunch gimmicks left, has been played at the cost of teaching savers a lesson for many years to come:” Don’t save, it ain’t worth it”.

These effects and their consequences are already here and are all part and parcel of a decline pathway. Manifestations of stagnating standard of living that cannot keep up with world growth.

These large democracies (the U.S. And the EU nation cartel included) have crossed the rubicon. Their citizens/voters are poised to respond to the malaise consequences of slower growth with ever more suicidal policies: The further and further direct and indirect flattening of the effort-reward curve.

Act accordingly.

While the world as a whole will continue to experience a long term fantastic trajectory of modernity (barring a large WMD conflict) the trajectory of western world voter-lemmings is not so bright. They are poised to undo the individual freedom advantage that brought them at the top of the prosperity scale in the first place. Most will follow through with that plan as collectivist automatons. The malaise of decline triggers the automatic suicide of coercive collectivism at the polls. Greece, Italy, Spain, France, and their still evolving trajectories of relative decline are not exceptions. They are the norm. They are your future. Look how Bernie Sanders is openly advocating this, and voter-lemmings are flocking.

Indexing of benefits in line with initial life expectancy would mean that retirement today would be delayed ’til one was 80 plus, a sobering adjustment. Better to go with an IRA type program investing in real assets than the paper non-existent “lock box”. The aged, and retired (me) are riding on the wagon being pulled by our children, and grandchildren. The retired and entitled generation, while enjoying benefits, are deluding themselves if they think they worked and lived so that their children would have a better life than theirs.